Mild Nod to Pension Reality Shows the Scam

You have to laugh (lest you cry) at the gimmicks of state government financing. Rhode Island General Treasurer Seth Magaziner is preparing to lead the state Retirement Board in reducing the pension fund’s discount rate (that is, the assumed investment return) from 7.5% to 7.0%. For the record:

The pension’s investments lost 0.27 percent in fiscal 2015-2016 and have gained 5.75 percent over the prior five fiscal years and 4.8 percent over 10 years.

Our investment assumption should be no more than 4.5%, because this assumption is supposed to be what we can reasonably guarantee the investments will yield. Unfortunately, the pension fund’s assumptions aren’t really meant to help the state plan accurately; they’re meant to hide the real cost of benefits that politicians have promised to unionized employees. As I’ve gotten Tiverton’s investment advisors to admit, the high investment assumption actually has built into it the willingness of elected officials to increase taxes down the road to cover shortfalls.

Notice, for example, that the treasurer’s plan delays increased payments for a year. That’s a political concession, not a financial one. Again, making the pension system work in the way that has been sold to taxpayers and employees is not the primary goal. Helping politicians get away with bad management and crony deals is.